Sanctions in Canada and around the world: how to hit a ‘moving target’

April 2022 | SPOTLIGHT | GLOBAL TRADE

Financier Worldwide Magazine

April 2022 Issue

On the morning of 24 February 2022, people around the world woke to the news that Russia had invaded Ukraine. As Russian forces marched toward Kiev, the governments of the European Union (EU), the UK, the US, Canada and other allies were preparing to levy what US senator Bob Menendez referred to as the “mother of all sanctions”.

As a result, organisations worldwide were left to navigate both the destabilised foreign policy landscape and an ever-evolving regulatory labyrinth. Sanctions are only one element of a broader trade restrictions landscape but are a favoured foreign policy tool of many governments. Because sanctions reflect political risks, evolving foreign policies, and national security goals and priorities of governments, they are subject to frequent change.

It is this frequent change – the ‘moving target’ – which raises practical challenges for organisations operating across international borders. Furthermore, while penalties for violating rules vary by jurisdiction, they can be severe, with significant civil and criminal penalties and, in some cases, imprisonment.

These challenges are often exacerbated by recent global developments, as most recently demonstrated by the conflict in Ukraine and associated sanctions imposed on Russia. We live in a globalised world; for many organisations the practical reality is that simply barring all transactions in any country which is itself subject to sanctions, or is home to individuals or entities who are subject to sanctions, is not a practical (or often even sufficient) solution. It is vital that organisations operating across international borders understand their obligations in this evolving climate, and how to ensure they are compliant.

The trade restrictions landscape

Many governments around the world, including Canada, have multiple restrictions in place governing trade with specific countries, organisations and individuals. Some of these restrictions are the result of specific events, such as the Russian invasion of Ukraine, while others are based on unfriendly regimes (e.g., North Korea) or are thematic in nature (e.g., counter-narcotics). Restrictions may be aimed at specific countries, individuals or organisations, may be based on a particular product, service or technology that is being exported or imported, or may be imposed to bar certain uses of an otherwise benign product or service.

Sanctions are a subset of these trade restrictions, and generally include trade restrictions that are targeted at specific jurisdictions or specific individuals and entities. Export controls, on the other hand, are generally focused on the type of good, service or technology at issue before the jurisdiction that is to receive the export is considered.

Sanctions can take a variety of forms, and span in severity from asset freezes on particular individuals to complete embargoes of jurisdictions.

Many sanctions are established by the United Nations (UN) Security Council, thereby creating a relatively uniform framework across the jurisdictions of UN member states. However, there are occasions where the UN is unable to act, or countries have a reason to implement independent sanctions for their own foreign policy goals. In order to facilitate such measures, a number of countries, including Canada, the US, the EU and the UK, have implemented domestic legislation enabling them to implement domestic sanctions independent of those imposed by the UN. It is under these various pieces of legislation which countries have been imposing the most recent bout of Russian sanctions.

Importantly, unilateral measures passed by a single jurisdiction can have tremendous extraterritorial effects. We have seen this most recently with the ‘de-SWIFTing’ of seven Russian banks by the European Commission (EC). While this measure was imposed unilaterally by EU Council Regulation 2022/345, it will inevitably have global consequences, and was done in consultation with Europe’s allies. The level of multilateral coordination in response to Russia is likely the most coordinated sanctions action in recent times and is critical to the impact that these sanctions will have.

The moving target: the evolving sanctions framework

The rapidly evolving situation with Russia has shown both businesspeople and legal practitioners the speed at which export controls can evolve, when there is political will to do so.

On 22 February, Canada and many of its allies announced their intention to levy new economic sanctions against Russia. The announcement came in response to president Putin’s recognition of two breakaway regions in Eastern Ukraine – Donetsk and Luhansk – as independent, and the deployment of military forces into the regions. Less than four days later, restrictions were increased: leaders of Canada, the EC, France, Germany, Italy, the UK and the US jointly announced additional measures (the ‘Joint Statement on further restrictive economic measures’, dated 26 February 2022).

These measures included the removal of select Russian banks from the Society for Worldwide Interbank Financial Telecommunications (SWIFT), making it extremely difficult for other parties to engage with these Russian banks or those that hold accounts with these banks. The measures also included prohibitions on dealing with Russia’s Central Bank, actions against wealthy Russians holding so-called ‘golden passports’, and the proposal of a transatlantic taskforce to ensure the effective enforcement of these measures. Within a week, Russia was subject to arguably the most stringent sanctions since those imposed on Iran nearly a decade ago.

In addition to coordinated efforts by Canada and its allies, countries also implemented their own unique measures. For example, the Canadian government has implemented import and export controls outside of the sanctions framework. Specifically, Canada has blocked any exports to Russia requiring export permits and cancelled existing export permits. Further, the government has also withdrawn ‘most favoured nation’ tariff treatment from Russia and Belarus, resulting in a 35 percent customs tariff imposed on goods produced in Russia and Belarus upon importation into Canada.

In summary, in the span of one week, Russia went from a relatively stable trading partner (albeit subject to limited sanctions), to being among the most difficult nations to trade with, particularly if you are based in the western world. As politicians announced new sanctions in rapid succession, organisations – and legal practitioners – found themselves clamouring to remain onside.

How to hit the target: practical steps for businesses

Businesses are operating in the world of the 24-hours news cycle. A world where Twitter can dictate headlines, reputation risks are as great to businesses as strategic, operating and financial risks.

In order to best mitigate risk, all compliance measures should be set and reflected by the organisation’s leadership. This ‘tone at the top’ can be formally established through – among other things – the careful drafting of compliance programmes and ensuring that these programmes are ingrained in day-to-day business operations. Leadership should instil the importance of compliance programmes throughout the organisation and ensure compliance programmes are kept relevant to the operations of their business.

Rapidly evolving sanctions further underscore the importance of organisations having strong compliance programmes. In particular, it is important that compliance programmes ensure that a business’ upstream and downstream partners are well known to it (through, for example, know your customer (KYC) requirements) and can respond quickly when required to handle new compliance risks. It can be extremely difficult for a business to respond to a sudden change in sanctions laws where it has not done the upfront work that will help it understand the scope of the risk posed by the change from the outset.

Organisations should also ensure that their compliance programmes are kept up-to-date and accurately reflect the sanctions laws of the jurisdictions in which the operate. Establishing a regular updating cadence, and ensuring updates are communicated as necessary through the organisation, are key to ensuring changes to sanctions laws that are smaller in scope but may have an outsized impact on your business are caught before they become serious issues.

These pillars of compliance are crucial to any business, and recent developments in global sanctions highlight the need to have such measures in place to pre-empt tumult. Sanctions are inherently reactive; when they are levied it is frequently urgent, and without much warning. Ensuring compliance programmes are drafted carefully and implemented throughout the organisation, provide insight into the organisation’s upstream and downstream partners, and are continuously maintained to stay up-to-date will position organisations to adapt as necessary when new sanctions are implemented.

Summary

Trade restrictions generally, and sanctions specifically, have been a favoured foreign policy tool of governments like Canada’s for many years, and they will likely continue to be for years to come. As they are intimately tied to changing national priorities and global events, sanctions can change at a rapid pace. The recent swiftness with which sanctions and other restrictive measures were implemented with respect to Russia’s actions in Ukraine illustrate the speed at which these obligations can change. Given the serious consequences of failing to comply with these measures, including significant penalties and imprisonment, organisations should ensure they stay onside of the sanctions measures that apply to them.

Organisational leadership plays a key role in setting up the policies and procedures that allow the organisation to respond quickly and effectively to changes in these laws. By ensuring compliance programmes are drafted carefully and implemented throughout the organisation, provide insight into the organisation’s partners upstream and downstream of it and are continuously maintained to stay up to date, organisations can make sure they are in the best position to hit these ‘moving targets’.

Alan Kenigsberg is a partner, Malcolm Aboud is counsel and Chelsea Rubin is an associate at Osler, Hoskin & Harcourt LLP. Mr Kenigsberg can be contacted on +1 (416) 862 6659 or by email: akenigsberg@osler.com. Mr Aboud can be contacted on +1 (416) 862 4207 or by email: maboud@osler.com. Ms Rubin can be contacted on +1 (416) 862 4852 or by email: crubin@osler.com.

Alan Kenigsberg, Malcolm Aboud and Chelsea Rubin

Osler, Hoskin & Harcourt LLP